Examining the Kau-Rubin Hypothesis for the Iranian Economy: Canonical Co-integration Regression (CCR)

According to the Kau and Robin (K&R) hypothesis, an increase in the government's power to collect taxes increases the size of government. In this regard, the main objective of this paper is to test this hypothesis for the Iranian economy during the period of 1971-2014. For this purpose, two variables are used as indicators of government's power to collect taxes: rate of female participation in the labor market and self-employment rate. The estimation method is a canonical co-integration regression (CCR). The results indicate no significant impact of the mentioned indicators on the government size. Thus, Kau-Rubin hypothesis is rejected for the Iranian economy. The FMOLS and DOLS estimators reconfirm the results.